Abstract

Product compatibility is becoming increasingly important especially in the IT industry due to a high level of network effect in this industry. This study empirically examines the business value of IT product compatibility initiatives with respect to the nature of the compatibility achieved (i.e., horizontal compatibility, vertical compatibility) and the type of focal product (i.e., software, hardware) for which compatibility is achieved. Using event study methodology, this paper investigates the market reaction to announcements of compatibility initiatives over a three-year period. The results show that business announcements associated with horizontal compatibility yield higher abnormal returns than the ones with vertical compatibility. Also compatibility initiatives for software products tend to be associated with a more positive stock market reaction than those for hardware products. Our findings reveal the nuances in IT product compatibilities and the need to develop a richer theory to enhance our understanding of the various IT compatibilities. Our findings also provide business insights to strategic planners and help them understand how and when to invest in IT product compatibilities to obtain positive reactions from investors.

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